ftlf10q_sept302015.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
For the transition period from N/A to N/A
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Commission File No. 000-52369
FITLIFE BRANDS, INC.
(Name of small business issuer as specified in its charter)
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Nevada
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20-3464383
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(State or other jurisdiction of incorporation)
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(IRS Employer Identification No.)
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4509 S. 143rd Street, Suite 1, Omaha, NE 68137
(Address of principal executive offices)
(402) 884-1894
(Issuer’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non–accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b–2 of the Exchange Act. (Check one):
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Large accelerated filer
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[ ]
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Accelerated filer
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[ ]
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Non–Accelerated filer
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[ ]
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Small reporting company
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[X]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class
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Outstanding at November 10, 2015
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Common stock, $0.01 par value
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10,358,222
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INDEX TO FORM 10-Q FILING
FOR THE QUARTER ENDED SEPTEMBER 30, 2015
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31.1
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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
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31.2
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
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32.1
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Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.
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32.2
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Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.
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FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying reviewed interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders' equity in conformity with generally accepted accounting principles. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that can be expected for the year ending December 31, 2015.
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FITLIFE BRANDS, INC.
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CONDENSED CONSOLIDATED BALANCE SHEETS
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| |
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(Unaudited)
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ASSETS:
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September 30,
|
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December 31,
|
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| |
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2015
|
|
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2014
|
|
| |
|
|
|
|
|
|
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CURRENT ASSETS
|
|
|
|
|
|
|
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Cash
|
|
$ |
3,054,663 |
|
|
$ |
4,353,699 |
|
|
Accounts receivable, net
|
|
|
4,839,334 |
|
|
|
1,685,623 |
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Inventory
|
|
|
1,670,264 |
|
|
|
2,284,922 |
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|
Deferred tax asset
|
|
|
689,000 |
|
|
|
689,000 |
|
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Note receivable
|
|
|
750,000 |
|
|
|
- |
|
|
Prepaid expenses and other current assets
|
|
|
231,452 |
|
|
|
47,202 |
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|
Total current assets
|
|
|
11,234,713 |
|
|
|
9,060,446 |
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| |
|
|
|
|
|
|
|
|
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PROPERTY AND EQUIPMENT, net
|
|
|
5,887 |
|
|
|
3,107 |
|
| |
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
930,065 |
|
|
|
1,037,369 |
|
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Deposits
|
|
|
3,048 |
|
|
|
3,048 |
|
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TOTAL ASSETS
|
|
$ |
12,173,713 |
|
|
$ |
10,103,970 |
|
| |
|
|
|
|
|
|
|
|
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LIABILITIES AND STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
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CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
2,534,158 |
|
|
$ |
813,600 |
|
|
Accrued expenses and other liabilities
|
|
|
325,417 |
|
|
|
152,736 |
|
|
Income tax payable
|
|
|
3,000 |
|
|
|
40,000 |
|
|
Line of Credit
|
|
|
437,089 |
|
|
|
437,089 |
|
|
Current portion of term loan agreement
|
|
|
520,887 |
|
|
|
507,031 |
|
|
Total current liabilities
|
|
|
3,820,551 |
|
|
|
1,950,456 |
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| |
|
|
|
|
|
|
|
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LONG-TERM DEBT
|
|
|
1,047,383 |
|
|
|
1,439,799 |
|
| |
|
|
|
|
|
|
|
|
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TOTAL LIABILITIES
|
|
|
4,867,934 |
|
|
|
3,390,255 |
|
| |
|
|
|
|
|
|
|
|
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CONTINGENCIES AND COMMITMENTS
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
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STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
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Common stock, $.01 par value, 150,000,000 shares authorized; 8,002,952 and 8,198,516 issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
|
|
|
80,030 |
|
|
|
81,985 |
|
|
Subscribed common stock
|
|
|
398 |
|
|
|
38 |
|
|
Additional paid-in capital
|
|
|
26,289,516 |
|
|
|
26,280,388 |
|
|
Accumulated deficit
|
|
|
(19,064,164 |
) |
|
|
(19,648,697 |
) |
|
Total stockholders' equity
|
|
$ |
7,305,779 |
|
|
$ |
6,713,714 |
|
| |
|
|
|
|
|
|
|
|
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
12,173,713 |
|
|
$ |
10,103,970 |
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements
|
|
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FITLIFE BRANDS, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
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| |
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(Unaudited)
|
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(Unaudited)
|
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| |
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Three Months Ended
|
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Nine Months Ended
|
|
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September 30
|
|
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September 30
|
|
| |
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2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
| |
|
|
|
|
|
|
|
|
|
|
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Revenue
|
|
$ |
6,270,524 |
|
|
$ |
5,492,334 |
|
|
$ |
15,139,949 |
|
|
$ |
17,812,097 |
|
|
Total
|
|
|
6,270,524 |
|
|
|
5,492,334 |
|
|
|
15,139,949 |
|
|
|
17,812,097 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cost of Goods Sold
|
|
|
3,658,541 |
|
|
|
3,646,397 |
|
|
|
9,015,846 |
|
|
|
11,361,133 |
|
|
Gross Profit
|
|
|
2,611,983 |
|
|
|
1,845,937 |
|
|
|
6,124,103 |
|
|
|
6,450,964 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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General and administrative
|
|
|
854,729 |
|
|
|
517,417 |
|
|
|
2,469,866 |
|
|
|
2,109,443 |
|
|
Selling and marketing
|
|
|
1,258,537 |
|
|
|
631,643 |
|
|
|
2,773,293 |
|
|
|
1,788,521 |
|
|
Depreciation and amortization
|
|
|
55,472 |
|
|
|
56,508 |
|
|
|
166,137 |
|
|
|
169,405 |
|
|
Total operating expenses
|
|
|
2,168,738 |
|
|
|
1,205,568 |
|
|
|
5,409,297 |
|
|
|
4,067,369 |
|
|
OPERATING INCOME
|
|
|
443,245 |
|
|
|
640,369 |
|
|
|
714,806 |
|
|
|
2,383,595 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (INCOME) AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
18,745 |
|
|
|
23,290 |
|
|
|
59,273 |
|
|
|
72,684 |
|
|
Other income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(87,500 |
) |
|
Total other (income) expense
|
|
|
18,745 |
|
|
|
23,290 |
|
|
|
59,273 |
|
|
|
(14,816 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAXES (BENEFIT)
|
|
|
41,242 |
|
|
|
53,000 |
|
|
|
71,000 |
|
|
|
215,771 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$ |
383,258 |
|
|
$ |
564,079 |
|
|
$ |
584,533 |
|
|
$ |
2,182,640 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.05 |
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.27 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.04 |
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.25 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,069,900 |
|
|
|
8,194,812 |
|
|
|
8,115,436 |
|
|
|
8,174,399 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
8,721,259 |
|
|
|
8,598,093 |
|
|
|
8,728,959 |
|
|
|
8,579,715 |
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements
|
|
FITLIFE BRANDS, INC.
|
|
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
|
|
| |
|
|
|
|
|
|
| |
|
(Unaudited)
|
|
| |
|
2015
|
|
|
2014
|
|
| |
|
|
|
|
|
|
|
Net income
|
|
$ |
584,533 |
|
|
$ |
2,182,640 |
|
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
166,137 |
|
|
|
169,405 |
|
|
Capitalization of select merger costs
|
|
|
(57,507 |
) |
|
|
- |
|
|
Common stock and options issued for services
|
|
|
405,741 |
|
|
|
139,015 |
|
|
Gain on write-up of investment
|
|
|
- |
|
|
|
(137,500 |
) |
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,153,711 |
) |
|
|
(1,796,161 |
) |
|
Inventory
|
|
|
614,659 |
|
|
|
242,078 |
|
|
Prepaid expenses
|
|
|
(184,250 |
) |
|
|
29,897 |
|
|
Note receivable
|
|
|
(750,000 |
) |
|
|
- |
|
|
Accounts payable
|
|
|
1,720,559 |
|
|
|
(102,355 |
) |
|
Accrued liabilities
|
|
|
172,681 |
|
|
|
(137,251 |
) |
|
Income tax payable
|
|
|
(37,000 |
) |
|
|
56,000 |
|
|
Redemption of preferred stock payable
|
|
|
- |
|
|
|
(15,459 |
) |
|
Net cash provided by / (used in) operating activities
|
|
|
(518,159 |
) |
|
|
630,310 |
|
| |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(4,106 |
) |
|
|
(2,162 |
) |
|
Long-term investment
|
|
|
- |
|
|
|
50,000 |
|
|
Repurchases of common stock
|
|
|
(398,209 |
) |
|
|
- |
|
|
Net cash provided by / (used in) investing activities
|
|
|
(402,315 |
) |
|
|
47,838 |
|
| |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Repayments of note payable
|
|
|
(378,561 |
) |
|
|
(365,059 |
) |
|
Net cash provided by / (used in) financing activities
|
|
|
(378,561 |
) |
|
|
(365,059 |
) |
| |
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH
|
|
|
(1,299,035 |
) |
|
|
313,089 |
|
|
CASH, BEGINNING OF PERIOD
|
|
|
4,353,699 |
|
|
|
3,305,179 |
|
|
CASH, END OF PERIOD
|
|
$ |
3,054,663 |
|
|
$ |
3,618,268 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental disclosure operating activities
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
59,273 |
|
|
$ |
72,684 |
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements
|
|
FITLIFE BRANDS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
NOTE 1 - DESCRIPTION OF BUSINESS
Summary
FitLife Brands, Inc. (the “Company”) is a national provider of innovative and proprietary nutritional supplements for health conscious consumers marketed under the brand names NDS Nutrition Products™ (“NDS”) (www.ndsnutrition.com), PMD™ (www.pmdsports.com), SirenLabs™ (www.sirenlabs.com), CoreActive™ (www.coreactivenutrition.com), and Metis Nutrition™ (www.metisnutrition.com). With the consummation of the merger with iSatori, Inc. (“iSatori”) on September 30, 2015, which became effective on October 1, 2015, described below (the “Merger”), the Company added additional brands to its product portfolio, including iSatori (www.isatori.com), CT Fletcher, BioGenetic Laboratories, and Energize (together, “iSatori Products”). The Company’s full line of nutritional supplements support athletic performance, weight loss and general health, and are distributed through franchised General Nutrition Centers, Inc. (“GNC”) stores located both domestically and internationally, and, with the addition of Metis Nutrition, through corporate GNC stores in the United States and Canada. The iSatori Products are sold through more than 25,000 retail locations, which include specialty, mass, and online.
The Company was incorporated in the State of Nevada on July 26, 2005. In October 2008, the Company acquired the assets of NDS Nutritional Products, Inc., a Nebraska corporation, and moved those assets into its wholly owned subsidiary NDS Nutrition Products, Inc., a Florida corporation (“NDS”).
FitLife Brands is headquartered in Omaha, Nebraska. For more information on the Company, please go to http://www.fitlifebrands.com. The Company’s common stock currently trades under the symbol FTLF on the OTCBB market.
Recent Developments
iSatori Merger. On September 30, 2015, the Company consummated the Merger contemplated by the Agreement and Plan of Merger, dated May 18, 2015 (the “Merger Agreement”), among the Company, ISFL Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger Sub”), and iSatori, pursuant to which iSatori merged with and into Merger Sub, with iSatori surviving as a wholly-owned subsidiary of the Company. The Merger was approved by iSatori shareholders at a special meeting held on September 29, 2015 and became effective on October 1, 2015.
In connection with the closing of the Merger, each holder of iSatori common stock has the right to receive 0.1732 shares of the Company's common stock for every share of iSatori common stock held on the Closing Date (the “Exchange Ratio”). The Company expects to issue approximately 2.3 million shares of common stock to iSatori shareholders. In the event any iSatori shareholder would otherwise be entitled to a fractional share of the Company's common stock, the Company will pay the value of those fractional interests in cash. Each outstanding stock option, warrant, and restricted stock unit measured in relation to, or settleable in, shares of iSatori common stock, as well as each award of restricted stock relating to shares of iSatori common stock, whether vested or unvested, was assumed by the Company and converted automatically into an option, warrant, restricted stock unit or restricted stock award, as the case may be, denominated in shares of FitLife common stock based on the Exchange Ratio.
Pursuant to the terms and conditions of the Merger Agreement, the Company increased the size of its Board of Directors (the “Board”) from five to seven members, appointed Stephen Adele, the former Chief Executive Officer of iSatori, to serve on the Board, and appointed two independent directors, Messrs. Seth Yakatan and Todd Ordal, each of whom were designated by iSatori, to the Board. Concurrently with these appointments, Dr. Fadi Aramouni resigned from the Board.
In addition to the foregoing, the Company secured an option to purchase almost 600,000 shares of the Company’s common stock issuable to the two largest shareholders in iSatori in connection with the Merger. Under the terms of the option, the Company may repurchase all or any portion thereof the applicable shares in its sole discretion any time prior to December 31, 2015. The Company also secured a right of first refusal to purchase more than additional 460,988 shares of the Company’s common stock issuable to a certain iSatori shareholder in the connection with the Merger.
On September 11, 2015, the Company loaned iSatori $750,000 pursuant to a Demand Promissory Note ("Note"), due and payable on demand after October 15, 2015 in the event the Merger was not consummated on or before such date. The proceeds from the Note were to be used by iSatori for the payment, in the ordinary course of business, of payroll and accounts payable of iSatori pending consummation of the Merger. The Note is expected to be deemed satisfied in full in connection with the effective date of the Merger and included as an element of the total purchase price, which also included the assumption of outstanding debt and the issuance of shares of Company common stock.
At closing, in connection with adjustment provisions outlined in the Merger Agreement, iSatori agreed to establish certain reserves and write-offs totaling approximately $1.8 million, which write-offs, together with the issuance of the Note and other variances of certain working capital accounts, resulted in a reduction of the Exchange Ratio under the terms of the Merger Agreement to 0.1732 shares of common stock of the Company for each share of iSatori common stock issued and outstanding.
Share Repurchase Program. On June 30, 2014, the Company’s Board of Directors approved a share repurchase program, pursuant to which the Company is authorized to purchase up to $600,000 of our common stock per annum, subject to maximum repurchases of $50,000 per month (the “Repurchase Program”). Additional purchases under the Repurchase Program may be made from time to time at the discretion of management as market conditions warrant and subject to certain regulatory restrictions and other considerations.
As of November 10, 2015, the Company had repurchased an aggregate total of 206,187 shares of our common stock under the Repurchase Program at an average purchase price of $1.93 per share.
NOTE 2 - BASIS OF PRESENTATION
Interim Financial Statements
The accompanying interim condensed unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation are included. Operating results for the three and nine month period ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. While management of the Company believes the disclosures presented herein are adequate and not misleading, these interim condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and the footnotes thereto for the fiscal year ended December 31, 2014 as filed with the Securities and Exchange Commission as an exhibit to our Annual Report on Form 10-K.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are as follows:
Principle of Consolidation
The consolidated financial statements include the accounts of the Company and NDS Nutrition Products, Inc. Intercompany accounts and transactions have been eliminated in the consolidated condensed financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net sales and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates.
These estimates and assumptions also affect the reported amounts of revenues, costs and expenses during the reporting period. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from those estimates.
Revenue Recognition
Revenue is derived from product sales. The Company recognizes revenue from product sales in accordance with Accounting Standards Codification (“ASC”) Topic 605 “RevenueRecognition in Financial Statements” which assesses revenue upon: (i) the time customers are invoiced at shipping point provided title and risk of loss has passed to the customer, (ii) evidence of an arrangement exists, (iii) fees are contractually fixed or determinable, (iv) collection is reasonably assured through historical collection results and regular credit evaluations, and (v) there are no uncertainties regarding customer acceptance.
Accounts Receivable
All of the Company’s accounts receivable balance is related to trade receivables which, in the quarter ended September 30, 2015, increased due principally to the transition to GNC’s centralized distribution platform. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company will maintain allowances for doubtful accounts, estimating losses resulting from the inability of its customers to make required payments for products. Accounts with known financial issues are first reviewed and specific estimates are recorded. The remaining accounts receivable balances are then grouped in categories by the amount of days the balance is past due, and the estimated loss is calculated as a percentage of the total category based upon past history. Account balances are charged off against the allowance when it is probable the receivable will not be recovered. The Company recorded an expense of $30,470 related to bad debt and doubtful accounts during the quarter ended September 30, 2015.
Allowance for Doubtful Accounts
The determination of collectability of the Company’s accounts receivable requires management to make frequent judgments and estimates in order to determine the appropriate amount of allowance needed for doubtful accounts. The Company’s allowance for doubtful accounts is estimated to cover the risk of loss related to accounts receivable. This allowance is maintained at a level we consider appropriate based on factors that affect collectability. These factors include historical trends of write-offs, recoveries and credit losses, the careful monitoring of customer credit quality, and projected economic and market conditions. Different assumptions or changes in economic circumstances could result in changes to the allowance.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At September 30, 2015, cash and cash equivalents include cash on hand and cash in the bank.
Inventory
The Company’s inventory is carried at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method. The Company evaluates the need to record adjustments for inventory on a regular basis. Company policy is to evaluate all inventories including raw material and finished goods for all of its product offerings across all of the Company’s operating subsidiaries. At September 30, 2015 and December 31, 2014, the value of the Company’s inventory was $1,670,264 and $2,284,922, respectively.
Property and Equipment
Property and equipment is recorded at cost and depreciated over the estimated useful lives of the assets using the straight-line method. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value and proceeds realized. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized.
The range of estimated useful lives used to calculate depreciation for principal items of property and equipment are as follows:
|
Asset Category
|
|
Depreciation/Amortization Period
|
|
Furniture and fixtures
|
|
3 Years
|
|
Office equipment
|
|
3 Years
|
|
Leasehold improvements
|
|
5 Years
|
The Company adopted Statement of Financial Accounting Standard (“FASB”) ASC Topic 350 Goodwill and Other Intangible Assets. In accordance with ASC Topic 350, goodwill, which represents the excess of the purchase price and related costs over the value assigned to net tangible and identifiable intangible assets of businesses acquired and accounted for under the purchase method, acquired in business combinations is assigned to reporting units that are expected to benefit from the synergies of the combination as of the acquisition date. Under this standard, goodwill and intangibles with indefinite useful lives are no longer amortized. The Company assesses goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter, or more frequently if events and circumstances indicate impairment may have occurred in accordance with ASC Topic 350. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference. ASC Topic 350 also requires that the fair value of indefinite-lived purchased intangible assets be estimated and compared to the carrying value. The Company recognizes an impairment loss when the estimated fair value of the indefinite-lived purchased intangible assets is less than the carrying value.
Impairment of Long-Lived Assets
In accordance with ASC Topic 3605, “Long-Lived Assets,” such as property, plants, equipment, and purchased intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill and other intangible assets are tested for impairment. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount in which the carrying amount of the asset exceeds the fair value of the asset. There were no events or changes in circumstances that necessitated an impairment of long-lived assets.
Income Taxes
Deferred income taxes are provided based on the provisions of ASC Topic 740, “Accounting for Income Taxes,” to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company adopted the provisions of FASB Interpretation No. 48 – “Accounting For Uncertainty In Income Taxes”–an interpretation of ASC Topic 740 (“FIN 48”). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company's tax positions and tax benefits, which may require periodic adjustments. At September 30, 2015, the Company did not record any liabilities for uncertain tax positions.
Concentration of Credit Risk
The Company maintains its operating cash balances at a large, commercial bank with offices across the country. The Federal Depository Insurance Corporation (“FDIC”) insures accounts up to $250,000.
Earnings Per Share
Basic income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options, warrants, and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. In the event of a loss, diluted loss per share is the same as basic loss per share, because of the effect of the additional securities, a net loss would be anti-dilutive.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced sale or liquidation.
The carrying amounts of the Company’s financial instruments, including cash, accounts payable and accrued liabilities, income tax payable and related party payable, if any, approximate fair value.
Recent Accounting Pronouncements
None.
NOTE 4 – INVENTORIES
The Company’s inventories as of September 30, 2015 and December 31, 2014 are as follows:
| |
|
September 30,
2015
|
|
|
December 31,
2014
|
|
|
Finished goods
|
|
$
|
885,766
|
|
|
$
|
1,904,950
|
|
|
Components
|
|
|
784,498
|
|
|
|
379,972
|
|
|
Total
|
|
$
|
1,670,264
|
|
|
$
|
2,284,922
|
|
NOTE 5 - PROPERTY AND EQUIPMENT
The Company’s fixed assets as of September 30, 2015 and December 31, 2014 are as follows:
| |
|
September 30,
2015
|
|
December 31,
2014
|
|
|
Equipment
|
|
$
|
293,275
|
|
|
$
|
289,169
|
|
|
Accumulated depreciation
|
|
|
(287,388
|
) |
|
|
(286,063
|
)
|
|
Total
|
|
$
|
5,887
|
|
|
$
|
3,107
|
|
Depreciation and amortization expense for the nine months ended September 30, 2015 was $166,137 as compared to $169,405 for the nine-month period ended September 30, 2014.
NOTE 6 - INTELLECTUAL PROPERTY
During the fiscal year ended December 31, 2014 the Company wrote off the remaining balance of its investment in YogaEarth Group LLC (“YogaEarth”) and recorded a $50,000 expense in connection with the write off. Contemporaneously with the write off, the Company, YogaEarth and other third parties (collectively, the “Parties”) entered into a settlement agreement (the “Settlement”) related to prior investment activity and intellectual property development initiatives undertaken by the Parties. Under the terms of the Settlement, YogaEarth agreed to sell its 50% ownership position in the kaniwa protein extraction intellectual property (the “Kaniwa IP”) to the other Parties for the termination of certain equity rights and claims held by such parties in and against YogaEarth. Under the terms of the Settlement, the Company issued shares of its common stock with a fair market value of $84,500 to the third parties in exchange for their 37.5% of the Kaniwa IP, resulting in the Company owning 100% of the Kaniwa IP. The Company booked the $220,000 implied value of the Kainwa IP to intangible assets, net and recorded a gain on the transaction of $137,500. Following the execution of the Settlement, the Company filed a patent application with the USPTO for the Kaniwa IP. On December 22, 2014, the USPTO notified the Company that its claims under the Kaniwa IP were not allowed. The Company filed a response with the USPTO on March 23, 2015. In July 2015, the Company received a Notice of Allowance from the USPTO regarding its claims for the Kaniwa IP. The Company anticipates the patent will issue sometime during the fourth quarter of 2015 or early 2016 and will otherwise pursue continuation claims related to the Kaniwa IP.
NOTE 7 – NOTE PAYABLES
Notes payable consist of the following as of September 30, 2015 and December 31, 2014:
| |
|
September 30,
2015
|
|
|
December 31, 2014
|
|
|
Revolving line of credit of $3,000,000 from US Bank, dated April 9, 2009, as amended July 15, 2010, May 25, 2011, August 22, 2012, April 29, 2013, May 22, 2014, June 25, 2014 and May 15, 2015 at an interest rate of 3.0% plus the one-month LIBOR quoted by US Bank from Reuters Screen LIBOR. The line of credit matures May 15, 2016 and is secured by 80% of the eligible receivables and 50% of the eligible inventory (such inventory amount not to exceed 50% of the borrowing base) of NDS Nutrition Products, Inc. The Company pays interest only on this line of credit.
|
|
$
|
437,089
|
|
|
$
|
437,089
|
|
|
Term loan of $2,600,000 from US Bank, dated September 4, 2013, at a fixed interest rate of 3.6%. The term loan amortizes evenly on a monthly basis and matures August 15, 2018.
|
|
|
1,568,270
|
|
|
|
1,946,830
|
|
|
Total of notes payable and advances
|
|
|
2,005,359
|
|
|
|
2,383,919
|
|
|
Less current portion
|
|
|
(957,976
|
) |
|
|
(944,120
|
)
|
| |
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
1,047,383
|
|
|
$
|
1,439,799
|
|
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company does not have a commitment and contingency liability associated with any third party consulting agreements.
NOTE 9 - RELATED PARTY TRANSACTIONS
None.
NOTE 10 - NET INCOME / (LOSS) PER SHARE
Basic net income per share is calculated by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share also includes the weighted average number of outstanding warrants and options in the denominator. In the event of a loss, the diluted loss per share is the same as basic loss per share. The weighted average number of diluted shares of common stock outstanding for the three months ended September 30, 2015 included 8,069,900 shares of common stock, 61,359 shares of common stock issuable upon the exercise of outstanding common stock purchase warrants, and 590,000 shares of common stock issuable upon the exercise of outstanding options to purchase common stock. The following table represents the computation of basic and diluted income and (losses) per share for the three months ended September 30, 2015 and 2014.
| |
|
September 30, 2015
|
|
|
September 30, 2014
|
|
|
Income / (Losses) available for common shareholders
|
|
$
|
383,258
|
|
|
$
|
564,079
|
|
| |
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
8,069,900
|
|
|
|
8,194,812
|
|
|
Basic income / (loss) per share
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
| |
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
8,721,259
|
|
|
|
8,598,093
|
|
|
Diluted income / (loss) per share
|
|
$
|
0.04
|
|
|
$
|
0.07
|
|
Net income / (loss) per share is based upon the weighted average shares of common stock outstanding.
NOTE 11 - EQUITY
Common and Preferred Stock
The Company is authorized to issue 150,000,000 shares of common stock, $0.01 par value, of which 8,002,952 common shares were issued and outstanding as of September 30, 2015. The Company is authorized to issue 10,000,000 shares of preferred stock in the aggregate, which may include up to 10,000,000 shares of Series A Convertible Preferred Stock, $0.01 par value, 1,000 shares of its 10% Cumulative Perpetual Series B Preferred Stock, $0.01 par value, and 500 shares of its Series C Convertible Preferred Stock, par value $0.01, none of which were issued and outstanding as of September 30, 2015.
As of September 30, 2015, 39,828 shares of common stock were approved for issuance by the Board of Directors, but remain unissued.
Options
As of September 30, 2015, 590,000 options to purchase common stock of the Company were issued and outstanding, 370,000 of which had an exercise price equal to $2.30 per share, 40,000 of which had an exercise price equal to $2.20 per share, 60,000 of which had an exercise price equal to $1.00 per share, and 120,000 of which had a strike price of $0.90 per share. During the three month period ended September 30, 2015, the Company did not issue options to management, key employees and members of the board of directors, and therefore recorded $0 expense.
Warrants
The Company values all warrants using the Black-Scholes option-pricing model. Critical assumptions for the Black-Scholes option-pricing model include the market value of the stock price at the time of issuance, the risk-free interest rate corresponding to the term of the warrant, the volatility of the Company’s stock price, dividend yield on the common stock, as well as the exercise price and term of the warrant. The Black Scholes option-pricing model was the best determinable value of the warrants that the Company “knew up front” when issuing the warrants in accordance with Topic 505. Other than as expressly noted below, the warrants are not subject to any form of vesting schedule and, therefore, are exercisable by the holders anytime at their discretion during the life of the warrant. No discounts were applied to the valuation determined by the Black-Scholes option-pricing model; provided, however, that in determining volatility the Company utilized the lesser of the 90-day volatility as reported by Bloomberg or other such nationally recognized provider of financial markets data and 40.0%.
As of September 30, 2015, 50,000 warrants to purchase common stock of the Company were issued and outstanding, additional information about which is included in the following table:
|
Issued
|
|
|
Exercise Price
|
|
Issuance Date
|
|
Expiration Date
|
|
Vesting
|
| |
25,000 |
|
|
$ |
3.000 |
|
11/01/13
|
|
11/01/16
|
|
No
|
| |
25,000 |
|
|
$ |
2.000 |
|
11/01/13
|
|
11/01/16
|
|
No
|
| |
50,000 |
|
|
|
|
|
|
|
|
|
|
|
Expected Dividend Yield
|
|
|
0.0 |
% |
|
Volatility
|
|
|
40.0 |
% |
|
Weighted average risk free interest rate
|
|
|
0.4 |
% |
|
Weighted average expected life (in years)
|
|
|
1.1 |
|
| |
|
|
|
|
Private Placements, Other Issuances and Cancellations
The Company periodically issues shares of its common stock, as well as options and warrants to purchase shares of common stock to investors in connection with private placement transactions, and to advisors, consultants and employees for the fair value of services rendered. Absent an arm’s length transaction with an independent third-party, the value of any such issued shares is based on the trading value of the stock at the date on which such transactions or agreements are consummated. The Company expenses the fair value of all such issuances in the period incurred. During the quarter ended September 30, 2015, the Company issued (i) 6,494 shares of common stock subscribed for services rendered by directors that elected to take their board fees in shares of common stock in lieu of cash payment and recorded an expense of $10,001 for the fair value of services rendered, and (ii) 33,334 shares of common stock for services rendered by the Chief Executive Officer subject to time-based vesting that vested during the quarter, for which the Company recorded an expense of $57,330. In addition to the foregoing, the Company also repurchased 46,387 shares of common stock during the quarter ended September 30, 2015 for aggregate purchase price, excluding transaction costs, of $73,521.
NOTE 12 - INCOME TAXES
The provision (benefit) for income taxes from continued operations for the period ended September 30, 2015 and the year ended December 31, 2014 consist of the following:
| |
|
September 30,
|
|
|
December 31,
|
|
| |
|
2015
|
|
|
2014
|
|
|
Current:
|
|
|
|
|
|
|
|
Federal AMT
|
|
$
|
13,000
|
|
|
$
|
24,354
|
|
|
State
|
|
|
58,000
|
|
|
|
147,000
|
|
| |
|
|
71,000
|
|
|
|
171,354
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
246,160
|
|
|
$
|
626,280
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
| |
|
|
246,160
|
|
|
|
626,280
|
|
|
Change in valuation allowance
|
|
|
(246,160
|
)
|
|
|
(626,280
|
)
|
|
Provision (benefit) for income taxes, net
|
|
$
|
71,000
|
|
|
$
|
171,354
|
|
Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes. The components of deferred tax assets consist principally from the following:
| |
September 30,
|
|
December 31,
|
|
| |
2015
|
|
2014
|
|
| |
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
6,385,000
|
|
|
$
|
6,602,000
|
|
|
Valuation allowance
|
|
|
(5,696,000
|
) |
|
|
(5,913,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
Deferred income tax asset
|
|
$
|
689,000
|
|
|
$
|
689,000
|
|
The Company has a net operating loss carryforwards of approximately $18,779,000 for federal purposes available to offset future taxable income through 2032, which expire in various years through 2032, The Company has provided a valuation reserve against the full amount of the net operating loss benefit, because in the opinion of management the benefits from net operating losses carried forward may be impaired or limited on certain circumstances. Events which may cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, limitations imposed under Section 382 of the Internal Revenue Code, as amended, from change of more than 50% over a three-year period. The impact of any limitations that may be imposed for future issuances of equity securities, including issuances with respect to acquisitions have not been determined.
ASC 740 requires the consideration of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Significant management judgment is required in determining any valuation allowance recorded against deferred tax assets. In evaluating the ability to recover deferred tax assets, the Company considered available positive and negative evidence, giving greater weight to its recent cumulative losses and its ability to carry-back losses against prior taxable income and lesser weight to its projected financial results due to the challenges of forecasting future periods. The Company also considered, commensurate with its objective verifiability, the forecast of future taxable income including the reversal of temporary differences. At that time the Company continued to have sufficient positive evidence, including recent cumulative profits, a reduction in operating expenses, the ability to carry-back losses against prior taxable income and an expectation of improving operating results, showing a valuation allowance was not required. At the end of the year ended December 31, 2014, changes in previously anticipated expectations and continued operating losses necessitated a valuation allowance against the tax benefits recognized in this quarter and prior quarters since they are no longer “more-likely-than-not” realizable. Under current tax laws, this valuation allowance will not limit the Company’s ability to utilize U.S. federal and state deferred tax assets provided it can generate sufficient future taxable income in the U.S.
NOTE 13 – SUBSEQUENT EVENTS
In connection with the consummation of the Merger on September 30, 2015, which became effective on October 1, 2015, the Company issued a total of approximately 2.3 million shares of common stock in exchange for all shares of iSatori.
Management has reviewed and evaluated subsequent events and transactions occurring after the balance sheet date through the filing of this Quarterly Report on Form 10-Q and determined that no additional subsequent events occurred.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Management’s Discussion and Analysis contains various “forward looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10-Q, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to “anticipates”, “believes”, “plans”, “expects”, “future” and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company’s business, including but not limited to, reliance on key customers and competition in its markets, market demand, product performance, technological developments, maintenance of relationships with key suppliers, difficulties of hiring or retaining key personnel and any changes in current accounting rules, all of which may be beyond the control of the Company. The Company adopted at management’s discretion, the most conservative recognition of revenue based on the most astringent guidelines of the SEC. Management will elect additional changes to revenue recognition to comply with the most conservative SEC recognition on a forward going accrual basis as the model is replicated with other similar markets. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein.
Forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results and achievements and cause them to materially differ from those contained in the forward-looking statements include those identified in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as well as other factors that we are currently unable to identify or quantify, but that may exist in the future.
In addition, the foregoing factors may affect generally our business, results of operations and financial position. Forward-looking statements speak only as of the date the statement was made. We do not undertake and specifically decline any obligation to update any forward-looking statements.
Overview
FitLife Brands, Inc. (the “Company”) is a national provider of innovative and proprietary nutritional supplements for health conscious consumers marketed under the brand names NDS Nutrition Products™ (“NDS”) (www.ndsnutrition.com), PMD™ (www.pmdsports.com), SirenLabs™ (www.sirenlabs.com), CoreActive™ (www.coreactivenutrition.com), and Metis Nutrition™ (www.metisnutrition.com). With the consummation of the merger with iSatori, Inc. (“iSatori”) on September 30, 2015, which became effective on October 1, 2015, described below (the “Merger”), the Company added addition brands to its product portfolio, including iSatori (www.isatori.com), CT Fletcher, BioGenetic Laboratories and Energize. (together, “iSatori Products”). The Company’s full line of nutritional supplements support athletic performance, weight loss and general health, and are distributed through franchised General Nutrition Centers, Inc. (“GNC”) stores located both domestically and internationally, and, with the addition of Metis Nutrition, through corporate GNC stores in the United States and Canada. The iSatori Products are sold through more than 25,000 retail locations, which include specialty, mass, and online.
The Company was incorporated in the State of Nevada on July 26, 2005. In October 2008, the Company acquired the assets of NDS Nutritional Products, Inc., a Nebraska corporation, and moved those assets into its wholly owned subsidiary NDS Nutrition Products, Inc., a Florida corporation (“NDS”).
The Company is headquartered in Omaha, Nebraska. For more information on the Company, please go to www.fitlifebrands.com. The Company’s common stock currently trades under the symbol FTLF on the OTCBB market.
Results of Operations
Net Sales. Revenue for the three months ended September 30, 2015 was $6,270,524 compared to $5,492,334 for the three months ended September 30, 2014, an increase of $778,190, or 14.2%. The increase in total revenue for the three month period ended September 30, 2015 was principally the result of continued strong unit movement at retail, increased sales from our established franchise-exclusive brands supported by the introduction of approximately 20 new products at the GNC franchise convention at the end of June, and strong initial demand for our newest brand, Metis Nutrition, which continued to roll-out into corporate stores throughout the third quarter. Revenue for the nine months ended September 30, 2015 decreased 15.0% to $15,139,949 as compared to $17,812,097 for the nine months ended September 30, 2014. The decrease in total revenue for the nine month period ended September 30, 2015 was principally caused by the previously discussed transition to the centralized GNC distribution platform in May and September of 2014, which had the effect of driving revenue into the first half of 2014 in anticipation of the transition.
Management believes that the backlog and supply disruptions incurred in the nine month period ended September 30, 2015 have largely been addressed, and are nonrecurring. The transition to GNC’s centralized distribution platform which established a new discounted pricing schedule placed into effect by GNC during the quarter ended June 30, 2014, which continued to affect sales during the nine month period ended September 30, 2015 compared to the comparable period in 2014, is also not anticipated to impact quarter over quarter and period over period comparisons subsequent to the year ended December 31, 2015. As discussed in prior reports, the pricing discounts impacting revenue in the quarterly periods subsequent to the quarter ended March 31, 2014 were largely offset through lower cost of goods sold and operating expenses in such periods realized in connection with the transition to the new distribution platform.
We currently market more than 60 products to over 900 GNC franchise locations both domestic and international, including the recent introduction of JXT5 under the Metis NutritionTM line for corporate stores. The Company introduced 20 new products at the GNC franchise convention, which was held in Las Vegas, NV from June 29 to July 1, 2015. The Company continually seeks to increase both the number of stores and number of approved products that comprise its domestic and international distribution footprint and, while no assurances can be given, we anticipate that such efforts, together with the introduction of additional new products, the recent launch of the Metis Nutrition line for corporate stores, and the addition of the iSatori products effective October 1, 2015 to the Company’s product portfolio, will continue to drive future revenue growth. While currently not a material component of revenue, management anticipates that continued international expansion will also be a major driver of future growth.
Cost of Goods Sold. Cost of goods sold for the three months ended September 30, 2015 increased to $3,658,541 as compared to $3,646,397 for the three months ended September 30, 2014, and $9,015,846 during the nine months ended September 30, 2015 as compared to $11,361,133 for the nine months ended September 30, 2014. The decrease during the three month period was principally attributable to improved pricing for certain raw material and components driven by volume discounts and management’s continued focus on cost reduction and efficiencies. The decrease during the nine month period ended September 30, 2015 was primarily attributable to lower aggregate sales volume versus the nine month period ended September 30, 2014.
General and Administrative Expense. General and administrative expense for the three months ended September 30, 2015 increased to $854,729 as compared to $517,417 for the three months ended September 30, 2014, an increase of $337,312, which included $250,594 of non-recurring general and administrative costs incurred in connection with the Merger during the quarter. General and administrative expense for the nine months ended September 30, 2015 increased to $2,469,866 as compared to $2,109,443 for the nine months ended September 30, 2014, an increase of $360,423, which included $502,432 of non-recurring general and administrative costs incurred in connection with the Merger during the nine month period ended September 30, 2015. Excluding non-recurring Merger-related costs, general and administrative expense for the nine months ended September 30, 2015 would have decreased $142,009 to $1,967,434. Although no assurances can be given, as we integrate the operations of iSatori, we anticipate a reduction in total general and administrative expense as a percentage of total revenue.
Selling and Marketing Expense. Selling and marketing expense for the three and nine months ended September 30, 2015 increased to $1,258,537 and $2,773,293, as compared to $631,643 and $1,788,521 for the three and nine months ended September 30, 2014, respectively. The increase in selling and marketing expense for the three- and nine-month period ended September 30, 2015 is principally the result of $319,337 of product rebates taken in connection with the 2015 GNC franchise convention and $127,620 related to the launch of JXT5, both of which were incurred during the three months ended September 30, 2015. The sales and marketing expense also reflects the addition of three new employees hired to support ongoing sales growth. As net sales increase, selling and marketing expense is anticipated to simultaneously increase, although management anticipates that selling and marketing expense will increase at a lower rate in subsequent periods.
Depreciation and Amortization. Depreciation and amortization for the three months ended September 30, 2015 decreased to $55,472 as compared to $56,508 for the three months ended September 30, 2014. Depreciation and amortization for the nine months ended September 30, 2015 decreased to $166,137 as compared to $169,405 for the nine months ended September 30, 2014.
Net Income/(Loss). We generated net income of $383,258 for the three months ended September 30, 2015 as compared to a profit of $564,079 for the three months ended September 30, 2014. We generated a profit of $584,533 for the nine months ended September 30, 2015 as compared to a profit of $2,182,640 for the nine months ended September 30, 2014.
Liquidity and Capital Resources
The Company has historically financed its operations primarily through equity and debt financings, and more recently, cash flow from operations. The Company has also provided for its cash needs by issuing common stock, options and warrants for certain operating costs, including consulting and professional fees. The Company did not engage in any financing activities during the quarter ended September 30, 2015. The anticipated cash derived from operations and existing cash resources are expected to provide for the Company’s liquidity for the next 12 months.
Cash Provided by/(Used in) Operations. Our cash used in operating activities for the nine months ended September 30, 2015 was ($518,159), as compared to cash provided by operating activities of $630,310 for the nine months ended September 30, 2014. The decrease is principally attributable to additional expenses incurred in connection with the acquisition of iSatori and normal variations in certain working capital accounts, principally accounts receivable. Net working capital decreased to $7,414,162 as of the quarter ended September 30, 2015 from $7,682,151 as of September 30, 2014.
Cash Provided by/(Used in) Investing Activities. Cash used in investing activities for the nine months ended September 30, 2015 was $(402,315) as compared to $47,838 provided by investing activities for the nine months ended September 30, 2014. The primary difference was the $398,209 recorded in connection with the Company’s Repurchase Program.
Cash Provided by/(Used in) Financing Activities. Our cash used in financing activities for the nine months ended September 30, 2015 was $(378,561), as compared to $(365,059) cash used in financing activities during the nine months ended September 30, 2014, both of which exclusively related the repayment of principal under the Company’s existing term loan with U.S. Bank.
WHERE YOU CAN FIND MORE INFORMATION
You are advised to read this Quarterly Report on Form 10-Q in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q, Annual Report on Form 10-K, and Current Reports on Form 8-K that we file from time to time. You may obtain copies of these reports directly from us or from the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20549, and you may obtain information about obtaining access to the Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains information for electronic filers at its website http://www.sec.gov.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our business is currently conducted principally in the United States. As a result, our financial results are not affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets. We do not engage in hedging transactions to reduce our exposure to changes in currency exchange rates, although as the geographical scope of our business broadens, we may do so in the future.
Our exposure to risk for changes in interest rates relates primarily to our investments in short-term financial instruments. Investments in both fixed rate and floating rate interest earning instruments carry some interest rate risk. The fair value of fixed rate securities may fall due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Partly as a result of this, our future interest income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that have fallen in estimated fair value due to changes in interest rates. However, as substantially all of our cash equivalents consist of bank deposits and short-term money market instruments, we do not expect any material change with respect to our net income as a result of an interest rate change.
We do not hold any derivative instruments and do not engage in any hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures were designed to provide reasonable assurance that the controls and procedures would meet their objectives. As required by SEC Rule 13a-15(b), our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining adequate internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has used the framework set forth in the report entitled Internal Control-Integrated Framework published by the COSO to evaluate the effectiveness of our internal control over financial reporting. Based on this assessment, our Chief Executive Officer and Chief Financial Officer have concluded that our internal control over financial reporting was effective as of September 30, 2015. This Quarterly Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our internal control over financial reporting was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Quarterly Report. There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
(b) Changes in Internal Controls Over Financial Reporting
There have been no changes in our internal controls over financial reporting or in other factors that could materially affect, or are reasonably likely to affect, our internal controls over financial reporting during the quarter ended September 30, 2015. There have not been any significant changes in the Company's critical accounting policies identified since the Company filed its Annual Report on Form 10-K as of December 31, 2014.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 26, 2014, Environmental Research Center, Inc., a California non-profit corporation (“ERC”) issued a 60-day notice (“Notice”) of intent to file suit against ourselves and NDS for alleged labeling violations of California Health & Safety Code §§ 25249.5 et seq., commonly referred to as “Proposition 65”. Under Proposition 65, any private enforcer such as ERC may file a lawsuit if it first issues a valid 60-day notice, and if the California Attorney General or other specified California public enforcers do not file suit within 60 days after service of the Notice. No lawsuit was filed against the Company or NDS by ERC, the California Attorney General or other California public enforcers within the 60-day notice period, and we are currently working to resolve this matter without litigation. However, we cannot at this time reasonably estimate a range of exposure, if any, of the Company's potential liability resulting from the notice and the alleged violations of Proposition 65.
On December 31, 2014, various Plaintiffs, individually and on behalf of a purported nationwide and sub-class of purchasers, filed a lawsuit in the U.S. District Court for the Northern District of California, captioned Ryan et al. v. Gencor Nutrients, Inc. et al., Case No.: 4:14-CV-05682. The lawsuit includes claims made against the manufacturer and various producers and sellers of products containing a nutritional ingredient known as Testofen®, which is manufactured and sold by Gencor Nutrients, Inc. (“Gencor”). Specifically, the Ryan Plaintiffs allege that various defendants have manufactured, marketed and/or sold Testofen, or nutritional supplements containing Testofen, and in doing so represented to the public that Testofen had been clinically proven to increase free testosterone levels. According to the plaintiffs, those claims are false and/or not statistically proven. Plaintiffs seek relief under violations of the Racketeering Influenced Corrupt Organizations Act, breach of express and implied warranties, and violations of unfair trade practices in violation of California, Pennsylvania, and Arizona law. NDS utilizes Testofen in a limited number of nutritional supplements it manufactures and sells pursuant to a license agreement with Gencor. On February 19, 2015 this matter was transferred to the Central District of California to the Honorable Manuel Real. Judge Real had previously issued an Order dismissing a previously filed but similar lawsuit that had been filed by the same lawyer who represents the plaintiffs’ in the Ryan matter. That related lawsuit is on appeal to the Ninth Circuit Court of Appeals. This matter has been stayed pending the resolution of that appeal.
We are currently not involved in any litigation except noted above that we believe could have a material adverse effect on our financial condition or results of operations. Other than described above, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of our subsidiaries, threatened against or affecting the Company, our common stock, any of our subsidiaries or of the Company’s or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Our results of operations and financial condition are subject to numerous risks and uncertainties disclosed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014. You should carefully consider these risk factors in conjunction with the other information contained in this Quarterly Report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted.
We have identified the following risk factor in addition to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014:
The Company faces risks associated with the acquisition of iSatori.
Our recent acquisition of iSatori may not achieve expected returns and other benefits as a result of various factors, including integration and other challenges, such as personnel and product introductions. In addition, we may not achieve anticipated cost savings resulting from the acquisition, which could result in lower gross margins, therefore materially affecting our results from operations and financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
During the quarter ended September 30, 2015, the Company repurchased the following equity securities:
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Total Number of
Shares Purchased
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Average Price Paid Per Share (1)
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|
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Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
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Approximate Dollar Value of Shares that May Yet Be
Purchased Under the Plans or Programs
(2)
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|
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|
|
|
|
|
|
|
|
|
|
|
|
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July 1 – July 31, 2015
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|
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-
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$
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|
|
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159,800
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|
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$
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250,000
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August 1 – August 31, 2015
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-
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|
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159,800
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|
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$
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200,000
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September 1 – September 30, 2015
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46,387
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$
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1.58
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|
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206,187
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$
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150,000
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Total
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|
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(1)
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Average Price Paid Per Share excludes cash paid for commissions.
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(2)
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Represents the approximate dollar value of shares the Company may repurchase during the year ended December 31, 2015. The Repurchase Program authorizes the Company to purchase up to $600,000 of our common stock per annum, subject to maximum repurchases of $50,000 per month. Additional purchases under the Repurchase Program may be made from time to time at the discretion of management as market conditions warrant and subject to certain regulatory restrictions and other considerations.
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As of November 10, 2015, the Company had repurchased an aggregate total of 206,187 shares of our common stock under the Repurchase Program, at an average purchase price of $1.93 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the period ended September 30, 2015.
There is no information with respect to which information is not otherwise called for by this form.
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31.1
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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
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31.2
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
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32.1
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Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.
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32.2
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Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase
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101.LAB
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XBRL Taxonomy Extension Label Linkbase
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Registrant
Date: November 12, 2015
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FitLife Brands, Inc.
By: /s/ John Wilson
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John Wilson
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Chief Executive Officer and Director
(Principal Executive Officer)
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Registrant
Date: November 12, 2015
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FitLife Brands, Inc.
By: /s/ Michael Abrams
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Michael Abrams
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Chief Financial Officer and Director
(Principal Financial Officer)
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